Human Capital Resource Disclosure: Risks & Best Practices

September 24, 2021

By: Howard A. Fischer

Bloomberg Law

The Securities and Exchange Commission (SEC) has rolled out new human capital disclosure rules, generating additional liability risks for public companies. The agency has federalized the human resources (HR) function, creating new avenues for investor assessment of companies, and significantly expanding potential liability, including that of enforcement cases, for disclosing companies.

On Aug. 26, 2020, the SEC announced amendments to SEC Regulation S-K involving the disclosure of various risk factors in proxy statements and annual reports. These rules apply to all public companies with periodic disclosure requirements. These amendments became effective Nov. 9, 2020.

The new rule provides that disclosures must include:

A description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel).

The  SEC  cautioned  that  the  measures  referenced  above  were  simply  examples,  not  mandates,  and  that  each  filer's “disclosure must be tailored to its unique business, workforce, and facts and circumstances.” Thus, rather than adopt specific rules and metrics, this amendment to Item 101(c) adopted a principles-based approach to disclosure of human capital resources.

There has been significant criticism of the revised rule and its perceived limitations on human capital disclosures, especially by Commissioners Caroline Crenshaw and Allison Herren Lee, who dissented from its adoption. Potentially, the SEC under Chairman Gary Gensler could revisit these issues, as it has announced it will do with a variety of other rules adopted under the Clayton-led Commission. It will not be surprising if more specific guidelines are put in place.

Until that time, however, filers will be compelled to determine how to comply with the new rule, and as the SEC decided to require disclosure following broad principles, rather than specific metrics, there is some confusion as to what is required. As set forth below, there are several concerns as to what might be encompassed within the scope of “human capital resources,” and this lack of clarity can create significant risk for reporting companies.

Compliance Problems

Considering how much time the SEC spent crafting these and other amendments to Regulation S-K, the human capital disclosure rule is a marvel of ambiguity. Among other things, the SEC did not define what was meant by “human capital” on the grounds, as described in the Aug. 26 release, that “this term may evolve over time and may be defined by different companies in ways that are industry specific.” This ambiguity, unfortunately, creates significant risks for public companies, which might entail an increased risk of civil lawsuits as well as enforcement actions.

The fact that the SEC requires additional disclosures of a subject that it refuses to define creates especially difficult circumstances for corporate disclosure, a fact reflected in the variety of responses. There have been multiple studies of corporate disclosures since the effective date of the amendments, which indicate a wide range of disclosure, with some human capital disclosures disposed of in a few sentences, while others reach almost 7,000 words.

Furthermore, the rule requires disclosure only of “measures or objectives that the registrant focuses on in managing the business.” What if a company, for example, doesn't focus on diversity in the management ranks? Or retention of key personnel? If a tech company, for example, doesn't focus on the fact that it has a 40% annual turnover of the software engineers vital to running their business, is that a good rationale for not having to disclose it? To what extent should these disclosures be quantitative—i.e., “the company has set a target of at least 30% diverse management level staffing within three years”—vs. qualitative?

Ultimately, it is likely that many filers will likely adopt one of two approaches: either erring on the side of more fulsome disclosure, or following the approach taken by the leaders in their market/business line. While multiple groups, such as the Sustainable Accounting Standards Board, or the International Organization for Standards, among others, publish materials that could help guide filers, what will be ultimately be deemed acceptable remains uncertain.

Diversity & Inclusion Disclosure

Whether or not diversity and inclusion efforts should be disclosed, and how they should be described, remains an open question. For many larger companies that already disseminate sizeable reports on their diversity efforts, either adding these disclosures in annual reports or including a link to them should not be problematic. But for companies that currently do not compile annual diversity disclosures, the question arises as to whether workplace diversity and inclusion is a material human capital resource that should be disclosed.

Several factors warrant discussion of diversity and inclusion efforts. First, there is a greater consensus in the corporate world that workplace and managerial diversity is essential. Just recently, Monolithic Power Systems, Inc became the last company in the S&P 500 to appoint a woman to its board. This evolution is further reflected by the decision by the NASDAQ exchange to submit a proposed rule change for SEC approval that would premise exchange listing on satisfying various diversity requirements.

In announcing the new rule, NASDAQ cited to multiple studies concluding that diversity improved corporate performance. Similar requirements have been approved in California as well that require publicly held companies domiciled in that state to include board members from certain defined underrepresented communities. Moreover, it appears from various reports that most companies are including this information.

Finally, there have been a spate of derivative shareholder lawsuits against companies with purportedly insufficient commitment to diversity and inclusion at the management and board level. At this point, these cases, many of them brought by the same California law firm, number almost a dozen.

Thus, given the attention to these issues by investors, exchanges, and plaintiffs’ firms, it can be argued that even without the mandate under Item 101(c) that diversity and inclusion issues are material human capital measures that should be disclosed.

Related matters are closer questions. For example, other inclusion related issues—like workplace culture, the availability of remote working and other forms of workplace flexibility, as well as pay comparisons across diverse populations—might also be viewed as forms of related human capital measures that should be disclosed.

Pandemic-Related Disclosures

In December 2020, The Cheesecake Factory restaurant chain agreed to a $125,000 fine for understating the impact of the Covid-19 pandemic on their business operations. This case was among a host the SEC has brought in the last 18 months or so, along with numerous trading suspensions, involving pandemic-related misconduct. Very few people would argue that the impact of the pandemic on company operations is not material to share price. But is it, or corporate preparedness for future pandemics, a material human capital disclosure?

Pandemic effect, and preparations for the pandemic and similar widespread medical concerns, can be considered as part and parcel of general workplace safety measures. Workplace safety measures are obviously more material for, say, factories, or meat processing plants, rather than law firms. However, given the chaos that the pandemic has wrought globally, it is likely best to create and disclose just-in-case responses to pandemic situations, much like companies should have a cyber-emergency response plan.

Liability Issues

Shortly following the effective date of these amendments, the SEC created a sizeable agency-wide task force housed in the Division of Enforcement to address the enforcement of ESG (environmental, social, and governance) issues. Among these issues are likely to fall human capital disclosures as a form of governance.

It is extremely likely, especially with an activist chairman at the helm of the SEC, that this new task force will commence investigations and bring enforcement actions relating to human capital disclosures. It is also likely that the SEC will seek to establish norms for human capital disclosures in the absence of specific guidelines through enforcement actions.

Another likelihood is that, in addition to the derivative cases already filed, that additional cases will be filed referencing the new human capital amendments.

Adapting to New Requirements

So what are the best ways to avoid these potential pitfalls and minimize the risk of investor lawsuits and enforcement actions by the SEC? Filers looking to comply with the new rules and minimize liability would be well-advised to adhere to the following four rough guidelines.

Engage with Core Constituencies

Most filers will have an investor base that varies from institutional holders, including asset managers and pension funds, to individual investors, and so on. Multiple reporting confirms that as more and more millennials acquire the capital to invest in equity markets, the greater the interest in more socially responsible corporate behavior, including in the realm of human capital.

More and more, larger asset managers are requiring an increasing turn towards social responsibility and disclosure about employment practices. Pension funds might seek greater disclosure regarding unionization, workplace safety, attitudes towards collective bargaining, compensation structures, and the like.

Companies should therefore make pains to attempt outreach across a broad range of investors and determine the scope of their disclosure expectations. Getting significant buy-in on reporting metrics in advance will help moderate risk by ensuring that reporting of human capital resources meets the range of investor expectations.

Consistency Over Time

Filers should also be prepared to employ a consistent set of metrics over multiple reporting periods, so that investors and the SEC can monitor progress and developments, as well as determine the scope and effect of changes and developments over time. The use of similar metrics, or a substantive explanation when those metrics are changed, provides a ready basis for comparison over time. Furthermore, use of the same metrics will make it easier to report and track performance over time.

For example, if diversity is a reported metric, companies should determine the dimensions along which it is measuring its diversity statistics, be it gender, race, national origin, economic class, or sexual orientation. Having a consistent set of these criteria will make it more difficult for regulators or private plaintiffs to bring disclosure related actions, as long as the company is making accurate disclosures about this data. On the other hand, using different criteria for different disclosure periods, without adequate explanations for the changes, might be a red flag for regulators and others.

Concordance with Other Peer Companies

While the SEC declined to identify specific guidelines for companies to follow, it did indicate that peer companies or geographical areas of operation will provide context, stating that: “the exact measures and objectives included in human capital management disclosure may … vary significantly, based on factors such as the industry, the various regions or jurisdictions in which the registrant operates …”

Currently, it appears that there is significant variation on human capital disclosures within industries, and a lack of widespread agreement on what disclosures to make. Ultimately, it is likely that companies within the same industry or sharing significant characteristics will converge on generally agreed upon metrics for disclosure, and that outliers risk drawing attention, by both regulators and plaintiff's counsel.

A competitor that provides fuller disclosure might be at a comparative advantage in terms of attracting investors, if all other things are equal; at the least, cohort disclosures might be a factor examined by investors and regulators. A reporting company that is significantly at odds with its competitors, especially if its disclosure is less expansive, might be making itself a target for regulatory action.

Incorporate HR Functions Into Reporting

To ensure that human capital disclosure conforms to actual company practice, and vice-versa, filers should also incorporate the human resources (HR) function with investor relations and government relations departments. This well help moderate the risk of an internal disconnect with respect to which human capital metrics are identified as material. Now that the SEC has essentially federalized the HR function, the relevant HR functions should be harmonized with those departments with significant reporting functions.


Companies with disclosure obligations under the applicable securities rules face great uncertainty, with not only an evolving set of standards, but the possibility of additional regulatory changes under the Biden administration. On June 11, 2021, the SEC's Office of Information and Regulatory Affairs released the SEC's planned agenda for rule making over the next few months, which included a proposal to consider “amendments to enhance registrant disclosures regarding human capital management.”

Given the ambiguity of the new rules, until there is further regulatory action fine-tuning their scope, there is a substantial likelihood that this scope will be further defined through enforcement actions and litigation. A smart, consistent disclosure regime that is thoughtful, consistent over time, and cognizant of the approaches taken by peer companies will help limit liability amid what is likely to be an aggressive SEC Division of Enforcement.

Rebecca Zittell assisted in research for the article.

Reproduced with permission. Published September 2021. Copyright © 2021 The Bureau of National Affairs, Inc.